Spring 2009

OBJECTIVES:  Generating financial forecasts (a fundamental element of any business plan)  To better understand the economics and drivers of the business and improve assessment of risk  to evaluate quantitatively alternative strategic options as well as assess the funding requirement  To provide a tool for the day-today management of the business

The most commonly used tool for business planning is a spreadsheet package such as Microsoft’s Excel

 Free of computational and technical errors  Consistent with the assumptions made about the market and the strategy and tactics to be executed  Capable of generating the results necessary to evaluate alternative strategic options  Complete in terms of capturing all the relevant revenues, operating costs and capital expenditure items as well as any financing cash flows, including interest and principal repayments on debt or dividends on equity  Cover the appropriate business planning time horizon and also the time period each year is broken down into, be it weekly, monthly, quarterly or annually;  Capable of easily running sensitivities and scenarios to test how robust the plan is in terms of unexpected changes in the environment;  Constructed to the appropriate level of detail.

The number of years to include in the business model and the number of periods each year is broken down into will vary between business planning projects.  A small business should forecast a few years beyond the year in which it expects to start generating cash  business model covering up to 3–5 years is usually sufficient as most small businesses will hope to begin generating cash within 1–3 years at most  For large companies a ten-year forecast is usually developed  Why bankers are interested? Bankers and equity investors providing finance to small businesses will be interested to know when their money is required and for how long.

If the business plan is intended to form the basis of the operational budget, a monthly-based forecast will probably be required. Otherwise a quarterly or annual forecast is usually sufficient. Slides by Payman Shafiee

 Example of a business planning model can be downloaded from your course website The model covers a ten-year period on an annual basis and generates a complete set of financial statements, including  profit and loss account (income statement),  balance sheet and cash flow statements,  as well as various valuation measures and a comprehensive set of financial ratios

The model also includes :  Staff cost calculations.  Bad debt assumptions.  Nine other operating cost categories that can be labelled by the user.  Inputs for expenditure on physical capital, such as vehicles, as well as expenditure on intangible items such as patents and licences.  Depreciation and amortisation workings for tangible and intangible assets  Working capital calculations for debtors, stock, trade creditors and taxation creditors.  Simple financing that includes a mixture of debt, equity or bank overdraft.  Computations for interest charges, principal repayments and the interest earned on short-term cash deposits at banks.

The importance of assumptions: Wrong assumptions, combined with accurate calculations will result in misguiding outcomes Perfectly designed and accurately executed simulations will not provide sensible results when the assumptions relied on are not correct Assumptions about our model can be found on page 5-6 of chapter 14 in your text-book Excel Business Planning Model

There are more advanced features that can be considered in producing a model:  The model could be changed to a quarterly or monthly version.  If the length of the periods is altered from an annual basis you must either adapt the calculations for interest, working capital and discount rates and so on to reflect the altered length of period or alter the inputs to accommodate this change in duration.

 to enhance the revenue forecasting elements to incorporate the techniques covered in Chapter 12. Simple development options include  Increasing the number of customer segments and  increasing the range of products sold.  Additional stock items can be introduced.  More sophisticated stock valuation techniques can also be employed, such as last in first out (lifo) or first in first out (fifo), which are discussed in the next chapter. Slides by Payman Shafiee

 Prepayments and accruals can be included.  The model could be extended to include a dividend debtor account.  Breaking down the asset lives: The model could be extended to include different types of capital expenditure items and the number of depreciation and amortisation workings could be expanded to reflect assets with varying asset lives.  Disposal of fixed assets: The sophistication of the capital expenditure workings could be expanded to introduce the disposal of fixed assets and the profit or loss on the disposal.  The taxation workings can be enhanced by limiting the length of time that losses can be carried forward.